QCOM: Competitors Won’t Easily Take LTE Share, Says Raymond James

By Tiernan Ray

As I mentioned this morning, Raymond James‘s Tavis McCourt today raised his rating on shares of wireless chip maker Qualcomm (QCOM) tod without adjusting estimates, arguing that competition in baseband processors from Intel (INTC) and Broadcom (BRCM) will slow the company’s growth next year and the year after, “but that Qualcomm will maintain a meaningful advantage on high end smartphones as it moves to 20 nanometer),” referring to the next leg down in chip feature sizes.

The spur to competition, as McCourt observes, is the race the move from plain-old 3G and 4G networks to “long-term evolution,” or LTE, which is now in all high-end smartphone releases.

Qualcomm outspends most of its competitors in mobile R&D by a factor of 5:1to 10:1 and most are not close to profitability still. To believe Qualcomm loses meaningful revenue share is to believe that Qualcomm is overseeing a misallocation of R&D dollars on an historic scale. In fact, Qualcomm’s R&D expense of ~$5 billion this year is likely greater than all its competitors’ revenues combined in WCDMA/LTE baseband/app processors.

As McCourt observes, “QCOM has a 28nm Cat 4 LTE modem on 28nm this year, integrated with a world class App processor/GPU, power management, various connectivity modules, etc… In 2014, we expect QCOM to be at a 20 nm node, and continue to have substantial SoC advantages over its LTE competition.”

While the chipset business is cooling for Qualcomm, notes McCourt, investors are missing the fact that its patent licensing division, Qualcomm Technology Licensing, or QTL, still makes up two thirds of its pre-tax profit and its still growing at a good clip, supporting its valuation (Qualcomm gets paid royalties on its wireless patents whether or not it ships a chip in a phone):

After 3 consecutive years of 30%+ revenue growth in the QCT business, of course it is likely growth will slow in 2014, but with QTL still growing double-digits and Qualcomm maintaining tremendous advantages in QCT, we believe double-digit EPS growth is still likely, while the shares are now trading atessentially the same multiple as the S&P 500. We simply do not believe it is likely QCOM will trade at a discount to the S&P 500 P/E given its advantages, growth outlook and dividend yield, making the risk/reward in the shares appear quite attractive.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.